Small Loss in Pending Home Sales Somewhat Encouraging, Economists Say

Economists had mixed reactions about the housing market following the release of some October data showing that while fewer people planned to purchase an existing home compared to the previous month, the decline was not as great as expected my markets.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the pending home sales index is modestly encouraging considering the extent of losses in other areas during the month.

"October was a disastrous month for the economy, following the Lehman bankruptcy filing on 15 Sep and the subsequent plunge in stock prices, yet pending home sales - contracts signed - showed no statistically significant response," he said.

Shepherdson said the trend in sales has been oscillating back and forth since April, but October's data needed to rebound to maintain that trend. Even so, he said it was a relief that the decline didn't match the market consensus view.

Economists from RDQ said not to get too optimistic, however, as pending home sales only represent contracts that have been signed but not finalized, and in the current climate, the percentage of potential buyers who close the sale could be a smaller than usual.

"Although pending home sales did not decline by as much as consensus forecasts, we believe that the pending home sales data (which are based on contract signings) may be less weak than existing home sales (which are based on contract closings) as it is possible that contracts were signed but purchasers were later unable to obtain mortgage financing given the freezing up of credit," they said.

Economics strategist Millan Mulraine from TD Securities said the correction in the U.S. housing market has been moving "at a fairly brisk pace," adding that this latest release points towards further softness in the coming months.

U.S. pending home sales tumbled by less than expectations with a 0.7% decline in October, according to the National Association of Realtors (NAR). The index now stands at 88.9, down from an upwardly revised 89.5 reading in September. The consensus from economists was for a 3.1% decline in the month.

Lawrence Yun, chief economist at NAR, emphasized that the pending homes sales index has fallen just 1% over the past year, which could be considered stable in the broader economic context.

"Despite the turmoil in the economy, the overall level of pending home sales has been remarkably stable over the past year, holding in a generally narrow range," he said. "We did see a spike in August when mortgage conditions temporarily improved, which underscores two things - there is a pent-up demand, and access to safe, affordable mortgages will bring more buyers into the market."

Yun projects that GDP growth in the U.S. will contract through the first half of 2009, then stabilize and expand in the latter part of the year when home sales recover. "Given the critical role of housing in an economic recovery, we're confident sufficient stimulus will be offered to bring more buyers to the market," he said.

The NAR said existing-home sales are forecast to total 4.96 million this year before increasing to 5.19 million in 2009 and 5.55 million in 2010.

By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2008